Lesson 03: Types of markets in stocks

•         Broker Markets: consists of national and regional securities exchanges

–        60% of the total dollar volume of all shares in U.S. stock market trade here

–        New York Stock Exchange (NYSE) is largest and most well-known

–        Trades are executed when a buyer and a seller are brought together by a broker and the trade takes place directly between the buyer and seller

•         Dealer Markets: consists of both the Nasdaq market and the OTC market

–        Trades are executed with a dealer (market maker) in the middle.  Sellers sell to a market maker at a stated price.  The market maker then offers the securities to a buyer.

Figure 2.3 Broker and Dealer Markets

 

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Over-the-counter (OTC) Market: involves trading in smaller, unlisted securities

Brokers Market

•         The New York Stock Exchange (NYSE)

–        Largest stock exchange—over 2,700 companies

–        Over 350 billion shares of stock traded in 2005

–        Accounts for 90% of stocks traded on exchanges

–        Specialists make transactions in key stocks

–        Strictest listing policies

•         The American Exchange (AMEX)

–        About 700 companies and 4% of stocks traded

–        Major market for Exchange Traded Funds

–        Typically smaller and younger companies who cannot meet stricter listing requirements for NYSE

•         Regional Stock Exchanges

–        Typically lists between 100–500 companies, usually with local and regional appeal

–        Listing requirements are more lenient than NYSE

–        Often include stocks that are also listed on NYSE or AMEX

–        Best-known: Midwest, Pacific, Philadelphia, Boston, and Cincinnati

•         Options Exchanges

–        Allows trading of options

–        Best-known: Chicago Board Options Exchange (CBOE)

•         Futures Exchanges

–        Allows trading of financial futures

–        Best-known: Chicago Board of Trade (CBT)

Dealer Market

•         No centralized trading floor; comprised of market makers linked by telecommunications network Both IPOs and secondary distributions are sold on OTC

–        40% of the total dollar volume of all shares in U.S. stock market trade here

–        Both IPOs and secondary distributions are sold on OTC

•         Bid Price: the highest price offered by market maker to purchase a given security

•         Ask Price: the lowest price at which a market maker is willing to sell a given security

•         Nasdaq

–        Largest dealer market

–        Lists large companies (Microsoft, Intel, Dell, eBay) and smaller companies

•         Over-the-counter (OTC) Bulletin Board

–        Lists smaller companies that cannot or don’t wish to be listed on Nasdaq

–        Companies are regulated by SEC

•         Over-the-counter (OTC) Pink Sheets

–        Lists smaller companies that are not regulated by SEC

–        Liquidity is minimal or almost non-existent

–        Very risky; many nearly worthless stocks

General Market Conditions

Bull Market

            1) Favorable markets

            2) Rising prices

            3) Investor/consumer optimism

            4) Economic growth and recovery

            5) Government stimulus

Bear Market

            1) Unfavorable markets

            2) Falling prices

            3) Investor/consumer pessimism

            4) Economic slowdown

            5) Government restraint

Globalization of Securities Markets

Diversification: the inclusion of a number of different investment vehicles in a portfolio to increase returns or reduce risks

Use of International Securities Improves Diversification

–        More industries and securities available

–        Securities denominated in different currencies

–        Opportunities in rapidly expanding economies  

International Investment Performance

–        Opportunities for high returns

–        Foreign securities markets do not necessarily move with the U.S. securities market

–        Foreign securities markets tend to be more risky than U.S. markets

Indirect Ways to Invest in Foreign Securities

–        Purchase shares of U.S.-based multinational with substantial foreign operations

Direct Ways to Invest in Foreign Securities

–        Purchase securities on foreign stock exchanges

–        Buy securities of foreign companies that trade on U.S. stock exchanges

–        Buy American Depositary Receipts (ADRs): dollar denominated receipts for stocks of foreign companies held in vaults of banks

Risks of International Investing

Usual Investment Risks Still Apply

Government Policies Risks

–        Unstable foreign governments

–        Different laws in trade, labor or taxation

–        Different economic and political conditions

–        Less stringent regulation of foreign securities markets

Currency Exchange Rate Risks

–        Value of foreign currency fluctuates compared to
U.S. dollar

–        Value of foreign investments can go up and down with exchange rate fluctuations

Trading Hours of Securities Markets

1) Regular Trading Session for U.S. Exchanges  and Nasdaq

–        9:30 A.M. to 4:00 P.M. Eastern time

2) Extended-Hours Electronic-Trading Sessions

–        NYSE: 4:15 to 5:00 P.M. Eastern time

–        Nasdaq: 4:00 P.M. to 6:30 P.M. Eastern time

–        Orders only filled if matched with identical
opposing orders 

Next -> Lesson 4

Referance:
1) Gitman, Joehnk; Fundamentals Investing 10th Edition; 2008